As a Wisconsin homeowner, you have the option to leverage your home equity to get cash quickly. One way to do this is through a home equity line of credit, or HELOC. You can then use the funds however you need: to consolidate debt, pay for education, renovate your home, or even make a down payment on a second home.
HELOCs come with a number of benefits over other loan options. At the top of that list is that HELOCs typically have lower interest rates than other types of loans on the market, such as personal loans or credit cards.
In this article, our experts provide tips for finding the best HELOC rates in Wisconsin and making the most of the equity you have built up in your home.
What Is HELOC?Let’s start with the basics. You can think of HELOC as a second mortgage borrowed against your home’s equity. Home equity is the difference between the value of your house and the outstanding primary mortgage amount. It’s the amount you have repaid on your original loan, plus any increase in value your home has experienced since you purchased it.
A home equity line of credit operates just as it sounds: it’s a line of credit to your home equity. HELOCs consist of two distinct phases: the draw and repayment periods.
The draw period is the time during which you can borrow money based on the amount of your equity you have been approved to borrow. The draw period typically lasts for 10 years. There are no restrictions on how many times you borrow, as long as you remain within the borrowing limit.
Most lenders require you to make monthly minimum payments on interest during the draw period. You can also repay the principal at this time; however, it’s not required until the next stage of the loan.
When the draw period is at an end, the repayment period begins. During this time, you can no longer borrow, and you must pay off the amount you have withdrawn through monthly installments of interest and principal. The duration of the repayment period varies, but it can usually last up to 20 years.
A HELOC is first and foremost a type of loan, and as is the case with securing any type of loan, a little bit of work is required to get the most competitive interest rates. Take a look at our top five tips to help you lock in the best HELOC rates in Wisconsin.
1. Pay Attention to Your Credit ScoreWhen it comes to determining your HELOC interest rate, your credit score plays a critical role. Lenders not only use it as a factor in deciding whether you qualify for HELOC, but they also take it into account in determining your interest rate.
Typically, applicants with a credit score of 680 or higher stand a better chance of snagging the best offer. A higher credit score indicates higher creditworthiness, which lenders see as reassurance that you’re more likely to repay the loan as expected. This confidence translates into lower interest rates.
If you have a less-than-perfect credit score, not to worry. There are a few things you can do to give it a boost:
- Always make your monthly debt repayments. Even if you don’t repay the total amount, keep paying the minimum balance.
- Pay your debt and bill payments on time. A borrower with a history of late payments is a red flag for lenders.
- Don’t apply for too many credit products in close succession, especially before you start applications for a HELOC. Whenever you apply, lenders pull your credit score to assess your creditworthiness, and these count as hard inquiries. Multiple hard inquiries bring down your score.
Opting for shorter draw and repayment periods can help you receive a lower interest rate. This is because lenders consider a shorter-term HELOC to be less risky.
This option can also be more attractive for the borrower, as the total interest paid over the life of the HELOC is less compared to that of a longer term. Ask your lender about your term options. They should be able to provide you with estimates for various terms.
3. Aim for an Optimal Debt-to-Income RatioLenders calculate your debt-to-income ratio to assess whether you can repay your existing debts and take on a new debt payment. All your monthly bills and debt payments count toward your total debt.
Too much debt can make getting HELOC at an attractive interest rate difficult. Lenders prefer a debt-to-income ratio of 36 percent or below. If your ratio exceeds that, be prepared to pay a higher interest rate.
4. Consider Fixed-Rate HELOCsMost HELOCs have a variable interest rate. This means you won’t know for sure what your final payment will be since interest rates will change with the current market conditions.
However, some lenders offer a fixed-rate option that is immune to market movement. As a result, you know exactly what your monthly repayment will be from start to finish. If you are a borrower with limited finances, looking for a lender that offers fixed-rate HELOC can help you bag the best rate.
5. Don’t Skip the Fine PrintHELOC interest rates consist of two components: a base rate, which fluctuates based on market conditions, and a markup, which is decided on the basis of your credit score, debt-to-income ratio, loan-to-value ratio, and so on. When looking for lenders offering the best rate, confirm whether the markup is fixed or variable.
Also, remember that the rates advertised by any lender are meant for borrowers with perfect credit profiles. So talk to your lender about how your credit score might affect the interest rate offered.
To find the best HELOC rate, there’s one more step: refrain from settling for the first lender who comes your way. You should shop around to find the lender with the best rates and terms.
If you’re in search of competitive HELOC rates in Wisconsin, talk to one of our experts. Capital Credit Union offers several options for borrowing against your home’s equity, including personal guidance from your first contact through closing. We’ll help you secure the best rate for a loan that fits your needs.